How will Modi govt fix India’s problems? : ft. Sanjeev Sanyal | Indian Business Podcast EP-13

our education system and I'm so sorry to say this it is just beyond pathetics sir so there are two problems Economist sanjie s sanjie s sanjie sanal who many would better know as the principal economic adviser to the government so what is this Hindu rate of growth so instead of blaming bad policy and calling it The Neu late of growth so let's blame it on uh India's cultural Roots Germany just has a population of 8.38 crores and yet their exports St and on the upwards of $1.6 trillion and here we have a population of 1.4

billion and yet our exports barely touch $800 billion sir why is there such a big gap and what are we doing to fix it I could give a long lecture on you know how we can improve this the MSM sector of India employs 100 million people it contributes close to 50% to our exports and yet it is one of those sectors which is just struggling for Capital why is that sir what was it like to do business in India and the 1980s and how is it far different today in 2024 no amount of lecturing will

teach you economics better than having your fingers burnt in a market crash let me tell you this so I actually disagree with that lecture thing and I'll tell you why [Music] hi everybody this is a conversation that I had with the economic adviser to the Prime Minister himself who goes by the name sanjie sanal and this entire episode involved a very heavy production and we were able to bring this episode to life only because of the kind support of our sponsors build School build school is a specialist in AI education now people we all know

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ideas act now seize this free opportunity click the link in the description to join the master class for free and now on with the episode good morning sir how do you do all good sir welcome to the Indian business podcast sir I've been watching a lot of your interviews and podcasts and I really admire the way you explain your answers using examples and case studies and data points so today what I want to do is I want to take this conversation further and deeper and try to understand what exactly is the definition of great governance

and what is India's approach to become a 1020 trillion do economy and what are the most important hurdles that we face as a country and what are we doing to overcome those hurdles to become A10 trillion economy and there's no better person than you to answer these questions sir so my first question is coming from the economic story of India sir I remember that when Modi G went to the US he specifically mentioned that the last time I was in US India was the 10th largest economy but today India is the fifth largest economy to

most people these may just seem like numbers and a large segment of the population also believes that we have become the fifth largest economy merely because of our population but sir you have been a participant in the economic story of India so sir what exactly have we done so differently in the past 10 years that we've taken this big leap to become the fifth largest economy so uh first of all we need to understand these numbers and let me put them in context so when we began liberalizing our economy I began become serious about economic

uh policymaking in 1991 we were only a 27 billion economy so we were that small it then took us 16 17 years till 20078 to become a$1 trillion economy okay that long how it look from there it took us 7 years okay to 20145 to become a$2 trillion economy now from there it should have been faster but then uh uh you know we we we took about about another s years odd partly because of covid to become a$ trillion economy which happened in 2122 then it we added another trillion dollars uh in just three years

so we were $3 trillion economy in 2122 this year in the year uh 202 2425 we'll be close to $4 trillion so another uh trillion dollar being added in 3 years a little over 3 years so the reason I'm making this point to you is this people forget the power of compounding okay China everybody say oh my God this is now a $19 trillion economy impossibly big do remember that they got here through compounding and people learned compound interest rates in school but they forget how powerful it is in the first few years it doesn't

seem to matter and then a few years later it just blows up so so this is the important thing so this power of compounding what what we are benefiting from this number of course is a nominal number not a real number but our economy last year grow by 8.2% it is growing at double digits in nominal dollar terms and uh this year again it'll go by 7% in real terms in again probably over 10% in nominal dollar terms the point I'm making is this 10 percentage Point compounding is massively power ful so we are now

at $4 trillion it take us two a little over two year two years somewhere in 207 or so we will become a $5 trillion economy along the way we will go past Japan which we should do this year or early next year and then another two years from there to go past Germany to become the world's third largest economy so what I'm trying to say is this is basically that compounding process now of course people will say that even when we are the world's third largest economy $5 trillion economy Etc we will be a per

capita terms poor no doubt about it we'll be the fifth largest economy now then third largest economy but we already are the by some margin the world's largest population so one divided by the other not surprisingly the number is small and it's barely three little around about $3,000 per capita remember us is at $80,000 per capita even if you adjust for purchasing power we will still be at little over $110,000 per capita okay so we are a poor economy not as poor as we used to be admittedly we used to have barely uh you know

3 and something $330 or something uh per capita in 1991 so from there we have grown a little less than 10 10 times so no doubt that we are much less poor than we used to be that that extreme kind of poverty I remember from my childhood is now restricted to much smaller areas and a much smaller segment of society but yes we are still very very poor and the solution to this is to keep this compounding process going everybody uh got here through compounding we are not going to be an exception China got through

it the West went through this compounding process they just started in the 19th century um through the 20th century over a long period of time we probably don't want to spend that much time getting here but even if we go for an East Asian model it was still compounding so the first point I want to make to you is no matter how you think about this this is about compounding and we have now reached a critical mass where that compounding is really beginning to count and so that point I was making is that we are

adding that extra trillion dollars faster and faster and that's how basically that's basically the the the point we have reached now some people will say and the point you were making is that this is only happening because we have we have a large population we are very poor and so on well utter rubbish we had a large population and even poorer in the 1960s and7 s we didn't grow we only began to get get going serious about growth in the '90s why because we began to have sensible policies right so the the the point I'm

making is that sensible policies matter Simply Having population doesn't get you there simply being poor and therefore having a catchup doesn't get you there not only forget India's own uh you know uh history of being very poor well there are many many countries in the world which are much poorer than us much of Africa uh there's Pakistan Afghanistan why aren't they growing uh faster than us so to make this case that we are growing faster because we are poor is atter rabish we have been even poorer in the past and we didn't grow so what

exactly have you done differently in the past 20 years because of which this compounding is happening little more than 20 years it really began in uh the90s uh the first step obviously was to um with the 1991 reforms I I I would count it as just like 1947 was um political Freedom uh 1991 uh Begins the journey to economic freedom so we first of all broke out of this extremely corrosive socialist uh uh framework and of course it happened not because we suddenly changed our worldview it happened because we had a crisis and um you

know the Soviet block collapsed and you know things changed but anyway nonetheless we since we began to introduce sensible policies first thing that happened is that we began to withdraw the Indian state from things it should not do okay so that entire licensing Raj that entire thinking process and allowing the private sector Innovation and all these kinds of things that is a very important reason why we began to grow and that process has taken us 30 years and let me say that we are we even today are reluctant reformers um but that process has gathered

PA and we have become more and more bold in what we have done so for example if you go back to the '90s we did do you know in 91 '92 maybe up to 93 we did a whole bunch of bold reforms once the economy recovered from the crisis we actually stopped doing reforms really yes so it's quite striking that in the second half of the '90s we did some reforms the odd one here there but we actually didn't do reforms we got growth by about 98 99 that growth momentum that we had got from

that first round of that began to falter okay so it's only again under the vajpai regime that another round of reforms happened and that generated the growth that you got in uh from around 2002 to 2007 six or their vot then unfortunately after the vajpai regime again reforms were few reforms were done so one of the problems is that we get a we do a bunch of reforms we get growth because of it and then we say okay now things are fine so we don't have to do any more reforms so again by 20078 we

got the global financial crisis but here in India the the the benefits of the vajpai reforms also then ran out and we hadn't done reforms then for the period from 2007 to uh 13 or so we instead of doing reforms we tried to keep growth going by essentially uh pumping up the uh banking sector and you know encouraging it to go out and give random loans so what happens as a result of that we do get some growth we do recover from the uh Global the shock of the global financial crisis but because it is

based essentially on expansion of of the monetary and fiscal and financial expansion and it is not based on actual supply side reforms what happens is that by about 20134 our banking system begins to be questioned uh our macro fundamentals begin to wobble U there is you will remember you know we began to be counted as the fragile five and so on so again growth begins to kind of be under pressure anyway the the the that decade of uh the 2010s uh the teens uh saw Global growth flowing generally because everybody had problems with their financial

sect and so so we were first of all in a slower Global growth environment our own banking system then had to be cleaned and so in the year 17 1819 we went through a fair amount of uh pain because we had to clean up our banking system uh uh something I was also one of the part participants in it many others also contributed to this cause uh several RBI Governors uh govern Deputy Governor uh acharia Deputy Governor vishwanathan Deputy Governor Jen there were banking secretaries here who did lot of great work there was aneli Dugal

after her um banking secretary um Rajiv Kumar um and so on and so I'm mentioning them because you see very often people forget the contributions of people who are one layer below the top layer so of course there was contributions from uh Governor Patel Governor Das and so on and the Finance Minister jley prime minister all at the very top level but I'm mentioning the layer below that also who put in a lot of effort and then the banking system got cleaned up at simultaneously we did one major reform the GST and you can complain

about the GST all you want the fact is it is a dramatic Improvement on whatever was there before I'm not saying that the current system cannot be improved I think it can be it needs a lot of simplification but whatever it is with all its flaws it's a dramatic Improvement on what was there before we introduced the insolvency in bankruptcy court so you know this whole business of carrying around uh defunct companies of the past and putting them in bfr which is basically a warehouse for dead companies you know finally we began to shut down

these companies and large companies were shut down you know whether it's jetways or these whole bunch of steel companies uh and so on so then one of course for the banks that was good because you you you created you know imposed creditor rights but generally speaking for the economy it's good because you are giving economic assets uh from uh you know and these are productive economic assets from a inefficient uh user to an efficient user and so on so there is this uh change uh and big bunch of reforms that happened which of course there

was a period of course then the two years of Co that we had to go through then what happens is that on the other side of it we because we had done all these reforms clean the banks we begin to benefit from all of those and so the important part of the thing is that we need to keep doing these reforms okay we have to be an apitic about ease of doing business ease of living simplifying the thing and I am a big advocate of something called process reforms you see everybody loves big structural reforms

but it's actually a lot of the gain in efficiency comes from small process reforms nuts and bolts you know this process here this rule here and uh if you go and look at the articles I write on the speeches I give I talk a lot about these nuts and bolts that you small changes you keep have to keep changing and so those are the things that suddenly get your system to grow and none of them will hit headlines but somebody has to pay attention to them and keep changing them and uh you know while I

am a big advocate of certain kind of structural reforms uh I have written extensively about and I have participated in formulating a lot of these smaller changes which people in that little sector will know about but widely people may not know okay so if I were to summarize your answer it is we went from being a state on economy to a market on economy because of liberalization we got rid of our socialistic Frameworks and then we introduced s several policies like IBC and in the process of that we also stagnated with our policy reforms because

of which we entered into a banking crisis and then once we got in IBC and reforms like that of GST today we are in a much today we are much better off as compared to the past so I want to go a little deeper into this uh Market run economy and state run economy and you mentioned the socialistic framework you know because we were born in the 1990s we are not able to appreciate the market that we exist in today so so could you please throw some light on what was it like to do business

in India in the 1980s and how is it far different today in 2024 so the best way to uh understand this is get up one morning see if you can find somebody who owns an old Ambassador car preferably one before they introduced the Isuzu engine in the '90s so really old Ambassador car just try and drive it okay you will realize what the problem is I mean you know the gear shift is not smooth it doesn't you need to five times to get it to get into the right gear it rattles when it goes it

speed is up and down uh it'll break down on you all the time uh and as I said the ones that are still around are mostly the ones from the '90s on Isuzu engines try and find if there's anyone one of them left from the PRI Isuzu Isuzu Ambassador car they were awful okay and when we finally when when when I as a as a teenager finally encountered a maruti 800 it was an absolute Revelation maruti 800 maruti 800 okay that was the that was the major uh sociological event of my childhood okay okay uh

was the maruti 00 because suddenly you had a car that actually functioned okay okay people don't understand this and since very often they have not they don't remember the pre uh you know improved Ambassador which even after the Improvement wasn't great car but you should really go back to the pre Isuzu engine ambassador to understand what a dramatic shift it was now this doesn't mean that after the 1991 reforms we became a great place to there's a lot to be done about our ease of doing business Etc but what has happened is at least there

is a mindset that came that doing business was a good thing and that at least some of the state chief ministers Etc began to think yes maybe attracted business is a good thing I mean these are radical ideas at one point in time they were Radical ideas you know just like you he some of that re rhetoric is still around okay that business is a bad thing yes absolutely you hear it in a diffused way as adani Amani Etc but when I was growing up it wasn't adani Amani it was tataba so you would hear

oh my God uh you know uh this is bad because Tata baa will take advantage of it or something and remember I grew up in 19 ' 80s Kolkata okay' 70s and ' 80s Kolkata where they actually threw out business threw out through threw them out so people don't realize that before uh Bangalore became the tech Hub of India most of these International tech companies and people with technology oriented sort of businesses or inclinations they used to be based out of Kolkata okay okay I remember in the ' 80s they're being actual large scale strikes

against the computerization and this remember first generation of computerization happen I mean proper computerization is being attempted that it is computers are going from some esoteric thing in you know a few Industries or in in University or uh uh scientific Labs or something to something that is being more widely used in the 80s there was a huge push back as a result of which the industry actually moved uh to Bangalore why sir because you know as I told you and this is why you have to understand the framework in which you think about an issue

the narrative framework of how you think about something is absolutely critical in the narrative framework of socialist India but specifically concentrated in um of uh communist ruled West Bengal The Narrative framework was that you cannot grow the cake it can only be divided so it was only about whether you um divide the cake between the computer and the incumbent Clark or whoever was going to get replaced by the computer the idea that you could upskill the person and use the computer to do more things uh simply wasn't a part of the conversation so you're saying

that in the 1980s business was a bad thing and and I also read somewhere sir that back then the tax rates were so high that the highest tax lab was somewhere around 93.5% no no it was 97% plus 97% in the in the in the 1970s and it was brought down significantly after that but you know that was kind of uh part of that entire thinking process yes so the government was thinking we'll just tax the rich and then pass on the welfare to the poor uh no it helped them basically you have to understand

the political economy that was the rhetoric G and so on but this is really about political power okay and so what were what were they trying to do essentially uh the political establishment and the bureaucratic establishment of that time essentially ganged up and they said look let let us introduce power on the whole system how do we do it we nationalize whoever we can so you know we'll nationalize the airlines we'll nationalize the banks what are you basically doing you are introducing control over the whole system and it was well understood even at that time

that all of this was a bad idea that is one of the funny things about this is this that this idea of called license Raj that we use even to this day is not a term that we came up with after we had done it and it turned out to be a bad idea okay licens Raj is a term used in the 1950s where rajaj GI when he's trying to warn the political establishment more more more generally the public that this is a bad idea so there are economists like shenoi who are warning people that

this is going to lead to bad outcomes and it does lead to bad outcomes so in the 1960s our economy basically falls apart we have to you know go begging to the Americans for food Aid and the' 70s our economy again collapses we have very high inflation that's why the emergency one of the reason one of the big reasons the emergency was introduced was because there was huge amount of turmoil okay and in the it continued into the 80s you know this kind of thinking although by the mid 80s finally we began to relent and

you know Rajiv Gandhi began to ease things up a little bit but point of the matter is this was the thinking process so you have to understand that this had a lot to do with the politics of the time and the imposition of control and by the you know the the political leadership of that time that did not want alternative sources of uh uh Power and so the nationalization of banks has even at that time was thought to be a bad idea in fact people do not understand that in even earlier in the 1950s LC

that you see today is the result of a large number of nationalization of insurance companies which were then Amalgamated into LC and within few months of that happening there was a massive Scandal called the Mundra Scandal okay in which it was discovered that this uh that this LC now big entity it monies were being used to for all kinds of political purposes to fund you know politically linked uh uh business and so there was a big Scandal I interestingly the then prime minister's son-in-law is the one fose Gandhi who is the one who in the

parliament brought it up okay and uh the then uh Finance Minister ttk who had to actually uh resign and uh it was a big embarrassment for the Prime Minister especially since his it was his son-in-law who had brought it up and so he never spoke to his son-in-law ever again damn so concentration of so this is one of the reason by the way interestingly fos Gandhi's name never comes up in any conversation because fos Gandhi was the person who actually uh opposed some of this uh uh you know uh clear um grab of resources that

the the his own you know in-laws were doing interesting so sir it was concentration of Power by the government and then spreading this narrative that business was bad which eventually stunted our growth is that it absolutely and then when it all went bad they didn't said it was the Hindu rate of growth so what exactly is going on here this is again a part of narratives okay okay so 607s sorry 50 60 70s happened you have now run this system based on the Socialist thing it has now failed for a significant period of time and

by this point in time you already have Korea Taiwan Singapore Etc they are have different uh who have changed their policies and are succeeding so it is quite obvious by the late '70s that this uh socialist system is a disaster so now who do you blame it so you blame it huh Hindu rate of growth it must be because you know those Hindus and their social Customs are all outdated and it is because of them so what is this Hindu rate of growth so the Hindu rate of growth is the we were growing at three

three somewhere 3 and a half% and that time the population growth was 2% so basically there was no per capita growth that was happening so instead of blaming bad policy and calling it The Neu late of growth so let's blame it uh on on on uh India's cultural Roots so the entire thing was then blamed as the Hindu rate of growth okay you'll see this term still used but what why was it used it's a lot of how you create you know narrative AES about whose failure it is it is not the failure of socialist

policies so the the the the the narrative that is being sold it's not that neeru and nvan policies failed uh India it is India and its cultural roots that failed Neu okay so that is how sir of course that's all politics basically when you failed you blame the victim and how did people believe it I mean what is this is you should ask the intellectuals of that time okay um why they were and in fact one of the things that I keep pointing out to you that even though it had clearly failed and by the

80s it was more than little visible and even you know in many of Rajiv Gandhi's uh statement you can see that you know he is acknowledging that this system had broken down I mean he makes a statement that for every rupee that the government spends on welfare schemes 85 I say disappear 85% leakage so he's acknowledging that this is happening but still the intellectual class continues to support these bad ideas because in many ways they are the beneficiaries of that system uh because the elite of that system is largely uh bureaucracy and so on and

they are the beneficiaries of the system similarly the uh the business class of that time uh they may crib about various things the fact of the matter is they are protected from all kinds of competition true yeah so never confuse capitalism with the personal interests of capitalists okay so when in 1991 our economy finally collapses and we are forced to do these reforms be very clear that the intellectual class of that time and I was at University at that time they were not in favor of the reforms there were very very few economists of that

time who thought it was a good idea they all argued against it but importantly to remember even the business Community large not everybody but largely they also argued against it even though you would think they were beneficiaries from they are not business Community as a whole benefits because it will grow Etc but individual business does not because they now will face competition if you're producing inefficient poor quality products and are able to get away with it you are now afraid that you know new competitors will come foreign foreign competitors will come and you will not

be able to compete so in fact ironically Indian business also argued against it interesting so now I want to come back to 2024 and now that we are in the capitalist era in the Indian economic story while we've become the fifth largest economy of the world I think so we have to rethink our benchmarks and we have to get rid of all the Pakistan narrative and the Socialist era narrative and we have to stop comparing ourselves with those entities and what I believe is the right comparison to make would be developed countries like Japan and

Germany and I was just doing a case study on Germany and I found something absolutely stunning Germany just has a population of 8.38 crores and yet their exports stand on the upwards of $1.6 trillion and here we have a population of 1.4 billion and yet our exports barely touch 800 billion sir why is there such a big gap and what are we doing to fix it so first of all um we have to remember that uh that for a very long time and I said this is also a part of that Legacy that I we

were not integrated to the world so we had this import substitution mindset and so and of course it protected all kinds of internal interests so we kept ourselves closed we it's only in the '90s we began to open it up and fair enough we did it carefully I think we were correct in doing that because we open things up too fast you'll get chaos so we took our time to do it which was fine but I think we have we then reached a point where we became we are now you know even that number that

you gave is of recent origin true you have to add to it the fact that we also became comparative in Services which uh is partly an artifact of the of of the fact that we liberalized our economy in the post digital age so we therefore that is a market that would not have been available to other countries so we have taken advantage of that but in manufacturing I would argue we can do a lot better and that requires us now um to be be much more aggressive in and you will see that we talk a

lot about manufacturing and even though there are people who argue that in India should somehow just use the services pathway um you know this government has been strongly stating over and over again that you know we why should we give up manufacturing there are many benefits to this U one is that you know we happen to be unique in that we have a domestic Market that allows leveraging up we have we are one of the few countries which actually have the skills to absorb this uh we already have many of these big companies here and

there is this General China plus one environment however that is the good side however the bad side is the world economy is not growing so it's always easier to grab uh market share uh in an environment that is expanding true rather than one that is stagnant so uh the Chinese had the advantage that they did this in the '90s and 2000s when the world was globalizing very rapidly and therefore you know in an expanding environment you can grow fast anyway now we are in a stagnant global environment relatively speaking and we have to grow in

that now I'm not saying it'll remain like this forever I'm sure the world goes through Cycles we'll also get a good good phase at some point in time but while we are waiting for the cycle to turn we have to keep investing on the supply side of the economy that requires that we invest into being competitive there's many things we need to do first of all we need to get our trade oriented infrastructure up in running okay trade oriented infrastructure yeah so that means that you know our highways our airports our uh business processes of

the in the Customs uh our ports are up to speed and you can see that we are building for example we you know our ports have become a lot more efficient than they used to be a true uh radically um similarly we are building this massive New Port in vavan just north of Mumbai our airports uh are not only a lot better than what they used to be but also uh we are building these brand new airports in many places but two really big ones one in Navi Mumbai one east of Delhi uh in Greater

Noida and so on and so forth um so that is one part of it just getting the physical infrastructure up in running the second thing is that we need to get our business processes um up to up to speed some progress has been made in this and I will give you some examples of how things have improved for example um patents okay just 6 seven years ago we used to do just uh 10,000 patents a year that's the number of patents we used to Grant and more than half of it used to go to multinational

companies which were just regularizing patents in India so they are not real Innovations in in India's context okay in the last Financial year 23 24 we did 1 lakh patents a year so in 7 years we have increased the number of patents granted by the system 10 times okay how sir by improving processes and doing a whole bunch of things and I've written extensively about it you can read about it okay okay so that's one kind of I'll give you another kind of process reforms you know everybody talks about ease of Entry but actually for

a Economy based on Creative destruction you need ease of exit as well ease of exit yes you know how easily can you shut down a company and I'm not talking about companies that are shut down because they go bankrupt those are forcibly bankrupt I'm talking about voluntary shutdowns in fact 70 80% of companies that shut down in fact maybe even more maybe 90% of companies that shut down in any one year are not shutting down because they went bankrupt okay they're shutting down for a variety of reasons you know the guy who's running the company

has got fed up of running it because whatever it's grown old his H doesn't want it or they can be a large company that is shutting down a subsidiary any number of reasons why for entirely voluntary reasons uh companies get shut down every year now earlier this was a real headache to shut down a company even when nobody was objecting to it it was not like there was a case that was outstanding or there was some outstanding some amount or there was some dispute no there were large numbers of companies which everybody agrees it should

be shut down but it would take years to shut them down why well there were the processes were ridiculous for example you had to get no's from various people you needed your company's name to be published in the newspaper that for some reason would be delayed and there's a whole wrist and I've also written about this extensively okay now about a year ago we created something called CPAs okay which the ministry of corporate Affairs created they simplified all the processes and they've automated it guess how long it takes now so what used to take years

3 4 years now takes 90 days 90 days 90 days we are the fastest place in the world to shut down a company voluntarily if there's no dispute interesting okay so why I'm bringing this up to you is that you know you can dramatically change something you pay your attention to the processes so we are not paying enough attention to these processes there are thousands of them you know our Metrology uh legal Metrology laws these are the laws relating to labels and weights and measures and things you know we need to simplify them we need

to you know there's a lot of uh unnecessary criminalization of of uh things which which lead to harassment rent seeking and all kinds of things by officials all kinds of things happen so we need to simplify them and create similarly you take our income tax system the rules are still very complic ated but the process thanks to being put online has become radically easier the refunds come through much more much more quickly there things are all connected we have anonymized it so hopefully the amount of you know random harassment Etc has gone down so point

I'm making to you is that we are at every step we're trying to improve it is not that this is perfect and with every change some other wrinkle appears also so you know we have introduced the GST we certainly a dramatic Improvement on you know the prora of of rules state level ooy all kind of garbage we used to have is gone but there are all kinds of kinks in the system even today people keep complaining about the GST system they kinks in the website doesn't work for some reason similarly in the in the uh

IPR regime we have solved significantly for patents but there are problems with the trademarks guys so we are continuously trying to improve but there has to be a single-minded attention to these uh process reforms because I think everybody loves Grand structural reforms but in fact much of the friction in the system is in the process interesting so you're saying that we first need trade oriented infrastructure and we need process reforms large numbers of them and as a matter of course that every day we get up make things better which will help us improve ease of

doing business absolutely that is ease of living also not just ease many of these things relate to just day-to-day living I mean ease with which for example and and and the Integrity of the process uh by which I get myself a passport a driving license all of these things have hopefully become significantly better in in recent years not just making it easier the Integrity of the system has to be still there I mean you still want to make sure the guy who gets a driving license actually knows how to drive so the Integrity of the

system is also important so here's where The Narrative of red tapism comes into play right could you please explain what exactly is red tapism so and how is it hindering our economic growth so this is the point I was making all this while and process reform is about getting rid of red tape okay so I think one of the major reasons why India also lacks in achieving exponential manufacturing growth is also because we are competing with China in terms of prices whereas Germany is competing with quality because I was reading about the mid Stan companies

in Germany and I saw this map of Germany where mid St companies are spread all across the country and 80% of these companies were located in those towns which had a population of less than 1 lakh and Germany as of 2022 had 1,400 World Market leaders so these companies were not Market leaders in Germany they were Market leaders across the world and when I looked deeper into what was the fundamental reason why they were Market leaders I understood that they have hypers specialized in doing one thing for example there's a company that just manufactures fridges

that's all there's a company that just makes wires and there's also a company which has been making beer for a Century but they do it so well that they do not have to compete on the basis of priz well I think that's a simplistic view but let's go back to a little bit of the history of how Germany got here do remember that Germany was united into a country only in 1870 yeah so it earlier it was actually a network of uh small kingdoms and each one of these small kingdoms had a um capital and

some sort of a hub when it then got united into a uh country in 1870 by bismar uh these hubs were all over the place so the way they worked rather than uh the way it worked in other countries so there are other developed countries where the logic work differently okay okay so for example in uh the UK uh there were very large clusters so there were three very large clusters one was in uh around London there was one in the Midlands around Birmingham and there was another further north in the north of England there

was so three big hubs and that's basically where it happened and then it there now a lot of de-industrialization has happened so London has remained as the main Hub now okay same thing has happened with uh par uh with France with Paris Paris is overwhelmingly the largest economic Hub of so this has not happened in Germany partly because of history and dispersed nature of it uh even in India um s history very often plays a role so if you look at Gujarat for example Gujarat because it was dispersed into a number of small kingdoms interestingly

even today it has large numbers of economic hubs it has got uh you know you'll have rajot Ahmedabad um Surat Baroda and so on uh they're all by the way many of these were capitals of small kingdoms and so on um I'll uh give the contrast with that with say West Bengal which had you know one major Hub Kolkata um or and so on so history does play a role in some of it how it develops and sometimes the highly concentrated model can also be extremely successful I mean Japan has an extremely concentrated model with

one really big city in Tokyo and then one or two other hubs Osaka or whatever uh but Osaka is much much smaller than Tokyo so uh let's not confuse success with the peculiarities of a decentralized model of of Germany nevertheless Germany does it in this particular way now Germany's model which I think the more interesting part is um I mean there there is there is the issue of decentralization which is in Urban Design and and geographical and that's a different conversation let me focus on the on this business of small specialized companies middle start basically

which does an amazing job and I think here also we tend to overstate the case many of these Mell starts feed into larger companies so do remember that they are not entirely independent bodies from the bigger companies uh that they feed into nevertheless it is true that Germany has this culture of many of these companies and they have done an amazing job so there is many things why it succeeds in doing this one of them of course is this amazing system of apprenticeships that they have where people uh that there and there is many other

uh reasons with it um but the point that you you made about Germany competing on quality and China competing on Price is actually no longer true China now is rapidly competing in quality as well there are many areas where they are genuinely at The Cutting Edge and much of that technology is learned from stolen whatever you prefer from the Germans so I think one of the real big problems that Germany is will now have is being able to compete with this rapid growth of China and moving which is moving up the bank value chain and

doing so uh so I personally don't think there is a uh choice that India has of competing going the German Way or the Chinese way uh the Chinese way uh competes on both fronts and in many ways uh the while we cannot exactly replicate their model because our political system is different etc etc but there are a few very key things to learn here first of all go to an industry and in the beginning do not get emotional about where in the value chain you are okay even if there is a big industry and all

you're doing there is turning the screws go into it that's how China got into Electronics right the first thing they were doing is just pure assembly true so do not you know many people in India said oh you know why are we only going into um you know the lower end we should go into the higher hello before you can run you have to walk the same you know very often you'll hear these sort of derogatory terms about you know Indians are only doing cyber kolly work well actually you have to start by being a

cyber kly um in fact India's entire software industry is based on a non-event it's called Y2K so don't have any emotions about dirting your hands at the bottom of the pyramid but then you have to have ambition and you know we have now shown ambition H Indian are showing ambition in the sense that you see uh when you say artificial intelligence is being developed by you know these top Google is that the other do remember that a lot of this is developed in India by Indians in the captives of these companies in India number one

number two the ambition that we have of moving up the value chain of Indian companies doing it that I think is something we need to encourage so it's not the lack of ability of Indians after all apple is able is increasingly making its phones in India uh foreign companies are able to uh uh uh you know compete in uh various markets around the world based on Indian research Indian development R&D and all kinds of things even Google Maps that is used worldwide uh is an Indian invention it was invented in the Indian offices of Google

so India Indians are able to do the question is why is India's corporate sector and I have now for the last half an hour 40 minutes criticized Indian bureaucracy government Etc um and the need to reform them I think this is a criticism I can fairly make about India's corporate sector again the lack of ambition okay it is extraordinary that Indian companies which are now global size companies they are not small companies anymore uh they are hugely profitable for the last several years and the amount of R&D Indian companies do is ludicrous for their size

okay uh and I you know Indian generics manufacturers okay they're not small companies why aren't they the guys who are now creating Cutting Edge molecules maybe there are some uh rules and regulations Etc that we need to change on the India side yeah fair you know that's what the government needs to do but I think a large part of it is simply lack of ambition on our Cor sector and we you know the this the poverty of aspiration which I often blame on um other parts of the system uh needs to also be is also

true of our corporate sector poty of aspiration I absolutely uh you know why are Indian companies not aspiring to be world leaders in certain things um and that will require you to invest in R&D you go into the R&D com uh departments of Indian Indian companies large Indian companies and there are some notable exceptions so you know I'm painting them with a Bard brush but generally speaking you wanted those German middle start company go and see them small companies doing enormous amount of research true okay is it because our our education system is not generating

great scientists I'm sorry you go and meet these middle start they come from very midlevel um you know it's not the top engineering colleges in Germany it's the middle ones even some of them have just been apprenticeship so they're not highly educated in that sense but there is a culture of continuous innovation that happens here there is an unwillingness to dirty your hands and that is that is very important it's it's the engineers who need to run Indian companies and it really bothers me that even where Engineers did create Indian companies the next generation of

those family own own companies then become basically mbas and become managers true they are not the guys going back there and doing Masters in chemical engineering their dad who set up the company was a chemical engineer this guy is a pretty boy who has got an MBA from fancy School in in America uh good at PowerPoint but cannot actually fix the uh machine and this is an issue so I think we need to begin get serious about a culture that does this and this as I I keep you know we Indians are not being ambitious

enough at multiple levels so two things that you mentioned that I found very interesting are the poverty of aspiration and number two is education I want I want to dig deeper into Poverty of aspiration I actually spoke to a lot of these msme owners and manufacturers and what they often complain about is the Chinese dumping the products in the market so if they're producing something at 5 rupees the Chinese dump to the market at 4 rupees so there is no way they could make a profit and when I spoke to them about why don't they

invest into R&D one primary reason that they pointed out is the lack of capital and that is when I started reading about oakin which India is recently getting into and that is what made me think that the msme sector of India employs 100 million people it contributes close to 50% to our exports and yet it is one of those sectors which is just struggling for Capital why why is that sir why is so there are many reasons for it um and I could give a long lecture on you know how we can improve this first

of all we need to lower the cost of capital in this country I think in the that is something that will happen naturally as we become a more developed country the cleaning up of the banks was an important part um the um bringing back a credit culture because remember if there's poor credit culture then the good debt are paying for the bad debtors true right so I think we need to lower the cost of capital in this country significantly some of it has happened okay okay if you look at the equity markets today you know

they good companies are getting massive premiums no problem getting Capital so I don't maybe historically true but at least at at the margin this problem is becoming much much lesser of a binding similarly if you have a really good startup up and you have a great idea you will get money so I think at the margin um this idea this problem is dissolving itself there is however two problems one is again going back to my earlier discussion we had about the the the rep tapism that is still embedded in our system you know the con

it's not big things very often the big things have in fact been resolved it's a continuous fiction of Regulation over regulation uh harassment and rent seeking that at the ground level is a major restraining Factor on uh middle middle level companies growing but I will say that we need to you know there is a general National problem of poverty aspiration that we have uh you know a lot of our talent for example in this country uh would rather uh you know spend years doing the upsc exam which with a 99 .9% failure rate then um

take a risk in pursuing a business uh or some other profession didn't you have to become a writer or an athlete or something else something some form of risk taking even though your success rates are higher there true so therefore there is a culture problem here which cannot be solved by the government it is something we as a people have to begin to think about after all the same people go abroad I mean I cannot believe that people go abroad uh to the US and make a fortune or go to Dubai or UK and make

a fortune right how do they do this why are we able to do this more successfully outside of our own country than in India the same person's cousin who is equally talented is unable to do it why um because I think one part of it is this whole rism the whole thing but some part of it we will have to accept as a society is a Poverty of aspiration which restrains you when you live here but you get liberated from when you are forced to do something in some other Society so I think the only

difference between India and the US and you just mentioned that the same person goes on to do extraordinary things in the US I think that is primarily because of the education system sir our education system and I'm so sorry to say this it is just beyond pathetic sir and I am the perfect byproduct of the education system my college had a rule of 75% attendance I did my civil engineering and we were building something called sea treatment plant and and uh my professor actually wrote a stat on the board which said that if the population

increases by 30% year on year this is the amount of waste that is going to increase so calculate the amount of waste and then build an STP and the first argument that I put forth was that if the population grows at 30% we are going to collapse so aren't we supposed to think about how are we going to reduce the amount of waste that each person puts out rather than building an STP and he had no answer to that and that is a clear indication of I would say that's a clear anecdotal evidence of how

our education system functions no there's a lot of problem with our education system so there are two problems here is uh a lack of performance due to education system alone and two should we improve the education system I think they two should be separated the reason is you see what happens is this debate otherwise goes into the following let's fix the education system and then we will get growth actually this is not how the world has functioned China grew with bad education system most of the guys who created these great companies are not very well

educated please go and meet the average uh Chinese billionaire he's not very well educated yeah duu Amani was not as well educated as his uh his descendants are but he created so first of all this whole idea that we know first we have to improve our education system then at some point I'm sorry if you go back and look at all the great companies of today in America with that great education system okay uh let me tell you Bill Gates College Dropout uh Zuckerberg College Dropout um uh you have many of the guys today may

have undergraduate degree um you know uh so the point I'm making is that first of all we this is part of that Poverty of aspiration that we have is that you know we will do only after finishing a PhD can you do some great thing no that is the wrong way of thinking about it in fact that is some part of our colonization of being Clarks that you know you can you know you can only do great things if you remain within the nice British education system and work your way up grade one to grade

two Clark and so on so this uh uh is part of that problem so please you know I'm all for improving the education system but let us please separate this from uh you know the need to get on with um more Innovative economy more risk-taking more all of this is a is a cultural issue it is not an education issue okay so let me okay so I want to make this clear otherwise we go into this circular thing however we do need to improve our education system because there are benefits from that too here I

would say we could spend the next 30 40 years trying to fix each college and I think it's too difficult to do this my own view is that the way we deliver education worldwide not just in India is already to outdate it it's a 19th century idea of giving lectures okay why do we need to give the same lecture in every College worldwide when we have YouTube you just need to give a good lecture once and everybody every body on the planet can watch it okay and then answering questions can be done by artificial intelligence

I mean how often will there be some one person in thousands who will ask a unique question which AI cannot answer okay for that you can have one supervisory Professor so the reason I'm making this line of thought out to you is this while you may need still for primary education the old classroom kind of thing just to get people on the rails a lot of tertiary education can be automated on a mass scale I am a firm believer that t tertiary education can be made almost free okay okay colleges should not be wasting their

time on giving lectures they should become places for research they should become certification and testing systems but giving M particularly undergraduate level lectures is a complete waste of time okay okay now in some subjects you may need like medical Etc you need to have hands on so fine this will not apply to them but I can't see why my subject economics cannot be completely automated except for special projects so you go to college you do some special project maybe a few thing testing and what happens then is you can dramatically expand the amount of people

who study these subjects um you know infinitely in fact so I believe that you know we are trying to solve the problem in the wrong way sir I think I sir I actually disagree with that lecture thing and I'll tell you why the example that I gave you about my professor my own best friend when he went to the US he was given a very similar problem statement but the difference in approach was that the professor conducted the lecture to provoke a particular discussion and debate about the entire town so fine fine you so therefore

you need to have face Toof face interaction for doing a limited number of projects true fine do it but just imagine if I then completely automate this lecturing business okay and then I then the same Professor can take 500 classes instead of taking five true because he's only taking uh you know doing the things where face to face interaction that you do project there are places where you need human interaction I agree with you but just imagine the same IIT campus today you're sending there people for four years they sitting the H campus now you

know a few times a year you call in people to do these things that are need otherwise it's all automated and you have tests and it's not like people can't use their time to do other things and then we create a much more Apprentice based system let people let young people go and work let them go into the factory floor and we all talking about uh German system the German system is based on apprenticeship I mean I mean throughout history 18 yearolds used to work what's the big deal even today some of our most skilled

people are doing this think of getting a chartered accountancy degree chartered accountancy is not based on your bcom most of those guys are working they are take Taking most of their classes online uh and you are creating ched accountancy highly skilled job corre okay now you are able to create them now you cannot tell me that you cannot create lower skilled activities like economists I'm sorry it is not a very high skilled job okay they are good economists and bad Economist that's a different issue but it is actually requires less uh face Toof face interaction

a lot of Economics can be generally taught and then take these guys the skill of Economics is in the doing put them into think tanks put them into policym put in financial markets okay no amount of lecturing will teach you economics better than having your fingers burnt in a market crash let me tell you this so you're saying that sir we have to strike a perfect balance between automation thought-provoking lectures and apprenticeship which will give the student yes so and so now the point I'm making is the model I'm saying is actually cheaper the guy

is working he's spending less time doing useless lectures which he can anyway do online in fact why does he even have to listen to his college lecturer he can listen to the best in the world so why haven't we done this in the past 10 years no no F there two reasons for it one is it was not possible okay till relatively recently it take some time for systems to catch up the second is as with any uh Innovation the incumbent of the system will resist it so today's Academia is not going to be deeply

happy about this anymore than uh you know lawyers are going to be happy with AI driven you know legal systems or um in the past I mentioned you know the Clarks and Kolkata being deeply unhappy about introduction of computerization the same thing will happen here uh the difference is that obviously uh Academia has much greater control over narrative building so they are going to resist this but I'm telling you this is the future so the last question that I have is about GST and this is something that I asked Nala maam also so I just

thought I would get a much better answer from you more elaborativeness is sold 18 rupees GST is collected out of that nine goes to the center nine goes to the state and this N9 rupees that goes to the state it goes to the consumer state which is let's say up and not the producer state which is Tamil Nadu and here's where governments like Tamil Nadu often argue that when we are the ones who have spent so much into building factories and incentivizing these businesses why are the consumer States gaining benefit out of it and not

us so how do you explain that sir so there are two parts of it first of all let me talk people get need to understand why there are multiple points of Taxation there many people love say you know we should have one tax and everybody pays it no you see the moment you create one tax the entire economy will change itself to not have to pay that one tax so you need multiple points hopefully light taxation so that people can be captured in the tax web in at in multiple ways so you do need direct

taxes which are more towards the producers if you can call it and then there are the consumption and taxes they the now that is the indirect taxes and direct taxes so first of all you need both of them if you have only one and too much of one everything the entire economy will uh fit itself it will change itself to try and avoid that one tax so that's one two about this distribution well first of all the producer state is benefiting massively from many of these things as well it's not the after all jobs are

being created in that state there are um uh uh uh you know more workers consequently they're also consuming they're also consumers so the consumers the producer state benefits massively from having production in their state to say that they do not benefit from it is utterly wrong um now of course the consumer is a important part of the equation and by the way there are many offsets along the way so it's not like because the consumption is happening in the last point they're getting all the taxes it is whole bunch of people along at each point

the tax is being paid uh so if further up the somebody produced thread they got an offset so it's not like the last guy is getting infect that is one of the points about GST that's a value added based it is not based on uh sales and therefore the final point so I I'm not certain that your uh example is even accurate okay okay now well the fact of the matter is that um uh we do have a system where I personally think it's a reasonably Fair system you can change it around but let me

tell you I'm not going to solve it if there are large consumer States um it is fair they they're probably also large population States and they need more taxes uh if for whatever reason you you you higher growth in your state uh including this uh production capacities you are presumably also generating higher GST from you know your you have after all t-shirts is not the only place gsts in you cement you're getting higher C from construction uh material uh from the fact that workers many of them maybe from up who have now moved to tupur

so I I am not so sympathetic to these these kinds of arguments as maybe you may think but occasionally you may require to do some balancing but generally speaking a simple system that applies to the whole is probably the better thing I am much more sympathetic to simplifying those slabs uh simplifying categorizations uh getting rid of bugs in the in the in the in the website and so on and so forth okay sir if it was so straightforward then why did we introduce the GST compensation because there was an earlier system okay there was an

earlier system you cannot suddenly change to one system and say that you know uh overnight all are um uh my I I you know my expenditures are based on a certain framework but you have been given a long time to transition so that it was a transition thing we all agreed as a country that this is a better system and I don't think anybody seriously wants to go back to the old system and if you want to please go and talk to people how things work before 20s you see people love criticizing the current system

which is perfectly fine for improving it but never try to go back to you know that should by under no circumstances an argument for going back to the earlier system which was a disaster I mean there were multiple taxes there were state boundaries it was an absolute mess so there is now been a transition state government should have adjusted to that transition they we provided compensation for it in fact for covid also extra compensation time was given so this thing has been extended longer than the would have been the case now you know states do

need to uh play by the current system understood sir thank you so much for your time sir it really means a lot I was able to understand everything and I just hope everybody else also understood thank you so much sir thank you very much [Music] [Music]